DaVita Positioned to Grow As Boomers Age

DaVita (DVA) is a narrow health stock, focusing nearly entirely on a single malady that can strike at any point in life. Nevertheless, the increasing median age of Americans, the company’s major market, suggest it is positioned to capture growing demand as the baby boomers get older.

DaVita provides kidney dialysis services primarily in the United States for patients suffering from chronic kidney failure, also known as end stage renal disease (ESRD).

At the end of 2011, the company provided dialysis and administrative services through a network of 1,809 outpatient dialysis centers located in the United States throughout 43 states and the District of Columbia, serving approximately 142,000 patients.

DaVita also provides acute inpatient dialysis services in approximately 900 hospitals and related laboratory services. The U.S. dialysis and related lab services business accounts for approximately 93 percent of consolidated net operating revenues. The remainder is ancillary services, mostly related to the core business.

DaVita also has begun to expand abroad, offering services at 11 outpatient centers in three countries outside the United States. However, the revenues in these start-up operations are not yet material, the company told investors.

Dialysis is a lifelong treatment for most that requires regular access to service. A little less than 400,000 people in the United States required dialysis as of 2009. The patient population expanded at a compound rate of 4 percent a year from 2000 to 2009, DaVita told investors, citing third-party data.

Medicare has covered dialysis treatment since 1972 regardless of age or financial need. In 2011, the U.S. government changed payments for dialysis to adjust for inflation.

“Although Medicare reimbursement limits the allowable charge per treatment, it provides industry participants with a relatively predictable and recurring revenue stream for dialysis services provided to patients without commercial insurance,” DaVita told investors at the end of 2011.

Nearly 90 percent of DaVita patients are in government-paid treatment programs, and about 80 percent in Medicare, the company said. Analysts note that while government payments are lower, the rising population of U.S. retirees suggests increased business for DaVita.

DaVita has a $8.12 billion market cap, compared to a $4.82 billion average in the healthcare providers and services sector. Its trailing 12-month P/E ratio is 17.26, just under the sector average. It has a five-year projected price-to-earnings-growth (PEG) ratio of 1.30, lower than the sector average.

The firm’s projected earnings per share growth over the coming year is 11.27 percent, less than the sector average of 14.10 percent.

Headwinds

Analysts are largely positive on DaVita’s prospects. William Blair & Co. rates it at outperform, as doe the analysts at Piper Jaffray, Standard & Poor’s, and Raymond James. Deutsche Bank and UBS give it a buy rating.

EVA Dimensions rates it underperform. Zacks Investment Research recently moved DaVita to neutral from outperform.

“We are downgrading our recommendation on DaVita to neutral based on an unfavorable shift in payor mix, the headwinds from debt refinancing and ongoing concerns related to the healthcare reform,” said the analysts at Zacks in early March.